What's Going On?

It's 10:00 a.m. The shopping center is about to open. Do you know who your landlord is?

Recently, I saw a report about a shopping center in the South. The owner was having issues with its mortgage, but neglected to mention this to its retailers. The tenants at the center instead one day received terse letters from the landlord's lender informing them they were now to send rent checks directly to the bank. There was no verbal communication from the landlord.

The retailers were scared. Vacancies at the property had risen. Now, out of the blue, it seemed like the owner had disappeared.

Questions had to have flooded their minds. Did this mean that maintenance would suddenly stop? What about other shared services? Was the bank in a position to handle day-to-day operations at the property? Was the center about to close? Would anyone be working on trying to fill the vacant space at the center?

In this situation, it turns out that the owner hadn't lost control of the center — at least not yet. They were in the midst of working on a forbearance agreement with the bank that had yet to be finalized. But the owner anticipated it would be business as usual at the center and they expected to stay firmly in control of the property.

But the situation raises some big concerns. The numbers have been out there for months. There are hundreds of billions in commercial real estate mortgages coming due every year. Borrowers have a limited ability to refinance. Inevitably, some of the properties will end up in the hands of banks.

What will that mean for tenants?

What I find most disturbing about the anecdote from the South is that the tenants were completely in the dark about what was going on. The landlord apparently wasn't obligated to keep them apprised of the situation. Tenants walked in one day and thought the mall had been foreclosed upon. Some thought it might be the first step in the eventual closure of the shopping center.

What's happening now — with properties potentially changing hands — doesn't have to be a terrifying process. In some cases, shopping centers going over to banks may be in the best interest of the center. A new manager — perhaps one with real turnaround experience — may come into control. If the previous owner had cut back on maintenance or other services, perhaps the bank's third-party manager will quickly turn things around. It could also expedite filling any vacancies by bringing in a group that has better relationships with national tenants.

This raises the issue of landlord/tenant communication. If an owner is about to exit stage left, shouldn't tenants know this is going to happen? This situation underscores the fact that tenants and landlords — if they are to survive this downturn — need to work together. A good starting point would be better lines of communication.